Official tells company to restate earnings

By Marcy GordonASSOCIATED PRESS

5:45 a.m. December 16, 2004

WASHINGTON – A review by the Securities and Exchange Commission has found that Fannie Mae violated accounting rules, buttressing earlier determinations by another federal regulator and amplifying the prospect of an earnings restatement by the mortgage giant.

Its shares were down $2.92, or 4.1 percent, at $67.77 in electronic trading in advance of the opening of the New York Stock Exchange.

SEC Chief Accountant Donald Nicolaisen on Wednesday disclosed the findings of the agency's review and said he had told the government-sponsored company to restate its earnings.

Nicolaisen, in a statement, said Fannie Mae's accounting for 2001 through mid-2004 "did not comply in material respects" with accounting rules for derivatives, financial instruments used to hedge against interest-rate swings, and for some transactions related to loans.

The SEC and the Justice Department have been investigating the accounting of Fannie Mae, which finances one of every five home loans in the United States. Fannie Mae said last month that if the agency found that it had improperly accounted for derivatives, it would show an estimated net loss of $9 billion for the third quarter of this year.

"We appreciate the comprehensive and expeditious review of these accounting issues," Fannie Mae spokesman Chuck Greener said in a statement issued Wednesday night. "We will take the steps necessary to comply fully with the SEC's determination. Fannie Mae is committed to operating in a safe and sound manner."

Nicolaisen said the SEC took the unusual step of making public the findings of the staff review before the SEC had completed its investigation because Fannie Mae had asked the agency for its opinion.

In September, regulators in the Office of Federal Housing Enterprise Oversight cited Washington-based Fannie Mae for serious accounting problems and accused the company of earnings manipulation. The regulators had ordered Fannie Mae to complete massive recalculations, and the delay fueled speculation as to whether the company would restate earnings.

Company chief executive Franklin Raines and Chief Financial Officer Timothy Howard defended the company's accounting in sworn testimony at a congressional hearing in October and rejected the regulators' allegations of accounting improprieties and management misdeeds going back to the late 1990s.

Fannie Mae last month missed an SEC deadline for filing its third-quarter financial results after its independent auditor KPMG refused to sign off on the report. The company also acknowledged that some of its accounting practices don't comply with generally accepted accounting principles.

A restatement could lead Fannie Mae's board to shuffle the company's executive ranks.

Rep. Michael Oxley, R-Ohio, chairman of the House Financial Services Committee and a longtime critic of Fannie Mae, said Wednesday that the SEC findings reaffirm the conclusions of the OFHEO regulators "and underscore the need for Congress to closely examine these issues."

"I am deeply disturbed that investors, the markets and Congress were misled by deceptive practices at Fannie Mae," Oxley said.

Fannie Mae and its smaller sibling Freddie Mac pump money into the home mortgage market by buying and guaranteeing repayment of billions of dollars of home loans each year from banks and other lenders, then bundling them into securities that are resold to investors. Their stock and debt are held by investors around the world.